Tuesday, October 29, 2013

Hungary says further rate cuts may follow

Hungary's central bank, which earlier today cut its base rate for the 15th time in a row, said "considering the outlook for inflation and the real economy and taking into account perceptions of the risks associated with the economy, further cautious easing of monetary conditions may follow."
The National Bank of Hungary, which cut its base rate by another 20 basis points to 3.40 percent, said the country's economy is likely to expand gradually this year and pick-up further in 2014 but output remains below its potential and unemployment exceeds its long-term level.
The country's economy, which expanded for the first time in the second quarter since the fourth quarter of 2011, is expected to continue to improve in coming quarters due to stronger demand for its exports and a gradual improvement in domestic demand.
"As a result, inflationary pressures in the economy are likely to remain subdued in the medium term," the central bank said.
Hungary's inflation rate rose to 1.4 percent in September from 1.3 percent in August, with the central bank attributing the low rate to the disinflationary impact of weak domestic demand so there is little pass-through of higher production costs into consumer prices.
"In the current environment, monetary policy can contribute to meeting the inflation target over the medium term by maintaining accommodative monetary conditions," said the bank, which targets medium-term inflation of 3.0 percent. The central bank has now cut its rate by 235 basis points so far this year and by 360 points since August 2012 when it began its current easing cycle. Today's rate cut was widely expected by economists and follows the bank's statement last month that it may cut rates further due to muted inflation and the economy's spare capacity. Earlier this week, a Reuters poll showed that economists expect the central bank to continue cutting its rate until it reaches 3.0 percent. Hungary's Gross Domestic Product rose by 0.1 percent in the second quarter from the first, for annual growth of 0.5 percent, the first annual growth since the fourth quarter of 2011. While the improvement in domestic demand is likely to be gradual, export growth is expected to expand in line with the growth of external demand, "which is expected to pick up markedly starting from the end of this year," the bank said. Investors' perception of the risk of investing in Hungary have improved over the past month, the bank said, with concerns over the U.S. Federal Reserve's tapering of asset purchases and disagreements over the U.S. federal budget diminishing. "In the council's judgment, changes in sentiment in global financial markets continue to pose a risk, which in turn calls for maintaining a cautious approach to policy," the bank said, adding that the perceptions of risk associated with Hungary's economy "may influence the room for manoeuvre in monetary policy."
There are growing signs that the central bank is getting closer to pausing in its easing cycle, with a member of the bank's rate panel telling the Wall Street Journal earlier this month that the bank has to tread with caution with further rate cuts to prevent a possible sell-off of Hungarian assets.